On February 24, 2012, two years after oral argument, the Texas Supreme Court issued its watershed decision inEdwards Aquifer Authority(the “Authority”)v. Day. The Court’s long-awaited decision included two significant pronouncements on groundwater that are likely to have ripple effects throughout the water community and could open the flood gates to a wave of litigation.

The case involved an application for a water well permit to the Authority filed by two individuals, collectively referred to as Day. The amount of water to which Day was entitled depended on his predecessor’s historic beneficial use of groundwater. Day’s predecessor had produced groundwater from an artesian well and had stored it in an on-site lake.

The first issue was whether the groundwater became state surface water when stored in the lake and, therefore, could not be considered in Day’s application. In Texas, surface water and groundwater are regulated differently, surface water being subject to regulation by a permitting program administered by the Texas Commission on Environmental Quality. The Court explained that the character of water could change and, in this case, where there was no evidence that the lake had been used for anything other than recreation, the Court upheld the Authority’s determination that it had become state water. The Court clarified that it was not suggesting that a lake can never be used to store or transport groundwater for use by its owner, but rather that the Authority could find from the evidence that Day had not made the requisite showing, that is, that his predecessor had used the lake water for a beneficial use, namely, irrigation.

The more significant issue was whether land ownership includes an interest in groundwater in place that cannot be taken for public use without adequate compensation guaranteed by the Texas Constitution. Distinguishing prior cases involving the rule of capture, the Court held that groundwater, just like oil and gas, can be owned in place even though others may lawfully drain it. The Court then discussed the factors for the district court to consider in whether the Authority’s denial of Day’s permit application had resulted in a compensable regulatory taking.

The Court noted that either a permanent physical intrusion or a deprivation of “all economically beneficial use” would be compensable. For other than these two narrow situations, the Court referenced the pertinent factors the U.S. Supreme Court identified in its 1978 opinion inPenn Central Transp. Co. v. NYC(1978). Those factors include: the economic impact of the regulation on the claimant; the extent to which the regulation has interfered with distinct investment-backed expectations; and the character of the governmental action,e.g.,whether it affects property interest through some public program adjusting the benefits and burdens of economic life to promote the common good. The Court affirmed the decision of the court of appeals and remanded the case to the district court for a determination of whether and to what extent a compensable taking had occurred.

The Court acknowledged that its holding - that land ownership includes an interest in groundwater in place and not merely a right to extract it - could open the floodgates to litigation, but stated that groundwater regulation need not result in takings liability. ThePenn Centraltest that the Court referenced, however, is not a bright-line test and its application will be fact intensive. As a result, groundwater conservation districts are left having to determine whether and to what extent their issuance of a permit constitutes a regulatory taking, if the applicant’s request is denied in whole or in part. The net effect on groundwater conservation districts, most of which are not well funded and are unable to bear the costs of litigation, will be to severely chill their ability to manage groundwater because of the liabilities they may incur in issuing permits.

Please feel free to contact us if you have any questions regarding these matters.